Weekend Strategy Review September 30, 2018

Last weekend, I spent a lot of time writing about the NASDAQ-100 or QQQ, telling you to pay close attention to the 180.5 level. So, on Monday, the Q’s fell over 2 points early to 181.5 (below my first downside target of 182) before recovering. The large cap technology index then sent the rest of the week retracing in what appears to be final wave ‘E’ of Wave 2 up. The last three days of the week formed bearish candles, all signs that the index is getting tired. My combination VTI-volume indicator for the NASDAQ remains neutral, so we still need to watch for a negative change to the indicator. A negative VTI-volume indicator could lead to a break of the 180.5 level on the Q’s, which would likely send large cap technology stocks reeling.

One of the reasons I continue to watch the NASDAQ is because on Friday, we saw Tesla (TSLA) get hammered. I wasn’t surprised. It’s not because the SEC came after it’s pot smoking CEO after he allegedly broke the law. No. I wasn’t surprised because of its pattern. The first chart I want you to look at today is TSLA and the large Hockey Stick Pattern that has been forming since early August. So, with that pattern, all it took was one news even to drop the stock 42 points. Patterns matter! That’s why I continue to talk about the NASDAQ. If I’m right about it being a Wave 2, the next wave down will be an impulsive Wave 3.

Patterns are a warning. If you see a negative pattern start to develop, you don’t have to wait for the indicators to turn negative before you get out. Students should realize that most indicators turn negative AFTER the fact. There are a few exceptions, but again the key word here is few. (Students should note how the volume portion of my VTI-volume indicator turned negative the day before TSLA fell). But that’s not the point of this discussion. The point is that IF you see a pattern start to develop, you should start getting concerned and lighten up.

Same for the breadth. For the past few weeks, as the Dow has been pushing higher, my breadth indicator (The Tide) has been warning that breadth on the NYSE is NOT following price higher. This negative divergence is another warning that a top of major significance is approaching. Can the markets continue to push higher? Sure, but just as we saw with TSLA, the pattern and breadth are telling us that a future news event could just as easily trigger a significant sell off.

I’m seeing the same types of warnings in Europe and other parts of the world. The second chart I want you to look at this weekend is Vanguard’s European ETF (VGK). This broadly based ETF holds stocks of most European countries. The thing I want you to see is the large Head and Shoulders Pattern (H&S) that has formed on the chart. Note how the neck line on the chart (the solid red line) is right at the 200-day moving average. So, any break of the neckline, would put the ETF into a down trend, sending it significantly lower. And IF Europe starts to tank, what do you think will happen to U.S. stocks? Do you really believe they will be able to withstand this pressure? I don’t.

Anyhow, I just wanted to give you a few things to think about this weekend.

Remember, my target for the Dow was the 26 600+ level. That target was hit and exceeded on 21 September when the Dow traded to a high of 26,769. Since then, the Dow has pulled back to 26,458 where it closed on Friday. The Ending Diagonal (ED) Pattern on the Dow suggests a top is approaching. However, we know ED’s can have a ‘through-over’ wave associated with it. So, this complicates things a bit. In other words, was the 169 point move above 26,600 the ‘through-over’ wave? Or will we have one more move higher before the final top is in. Hmmm? I can’t answer that question. All I can tell you is that like Tesla, there’s a very reliable pattern in place and that once it completes, the pattern suggests the next move will drop the Dow to the 24,000 level or below. And IF this happens, I would have to label the decline as Major Wave 1 down of the next Bear Market.

The Sector Ratio rose to 16-8 after Friday’s session. The Strong Sector List continues to be dominated by ‘defensive’ sectors like Household Products, PharmaBio, Energy, FoodDrugs, and Telecoms.

The Weak Sector List was led by Real Estate, Banks, Retail, Consumer Products and Service.

Gold (GLD) bounced 0.71 cents on Friday to 112.76. Again, the reason I’m watching GLD now is because of its pattern. Major Wave 2 down appears to be nearing completion. If I’m right about the pattern, gold should be a nice place to be for the next few years. Again, patterns matter. That’s why I continue to hold my ‘trial’ positions in the miners. If some news even triggers the start of Major Wave 3 up, just like it did for Tesla on the downside, I want to have a few bucks invested in mining stocks and ETFs. GDX is one of my ‘trial’ gold holdings (Chart 3). It’s VTI-volume indicator is neutral, but IF it can move above the 19.1 level, it would break out of another pattern. In this case, the pattern is a Bullish Head and Shoulders with a short-term target above the 21 level. If this happens, it would be EXTREMELY positive long-term for gold and the miners.

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All of the commentary expressed in this site and any attachments are opinions of the author, subject to change, and provided for educational purposes only. Nothing in this commentary or any attachments should be considered as trading advice. Trading any financial instrument is RISKY and may result in loss of capital including loss of principal. Past performance is not indicative of future results. Always understand the RISK before you trade.